INSUBCONTINENT EXCLUSIVE:
A couple of things happened last week in India that deserve a bit of attention -- mostly because they reveal how deep the country's
structural problems go and how few good options the government has left
The first was the Reserve Bank of India's decision to hold interest rates steady even though the rupee had hit record lows against the
And the second was the federal government's attempt to suppress rising fuel prices.The RBI's steadiness on rates was born of its belief
that inflation was close enough to the bank's target zone
Now, you might disagree with this belief -- as I do -- but there's no question that the central bank's monetary policy committee was
doing its job as it saw it.The problem lay in the reaction to the RBI's decision
Naturally, the rupee fell even further; markets had hoped for higher interest rates that would have encouraged foreign investors not to sell
their rupee-denominated assets
A chorus of voices, some within the political establishment, began to complain that the RBI was ignoring the rupee, ignoring threats to
growth and so on.That's no longer the RBI's job, however
One of the big institutional changes of the past few years in India has been the creation of a legal mandate for the RBI to target inflation
Rational monetary policy, made along predictable lines, is a good thing
Hopefully this won't lead to another round of tension between the RBI in Mumbai and Finance Ministry bureaucrats in New Delhi
The government tried various measures last month to prop up the rupee.If the government is so concerned about the rupee, one would think it
would be pushing to raise, not lower import prices
Instead, last week officials told state-run (but publicly traded) oil companies to reduce prices by a rupee a liter and to absorb the losses
themselves.The government also cut taxes on fuel by Rs
1.50 a liter, even though it can ill afford the hit to revenue: It's already run through almost 100 percent of its targeted fiscal deficit
in just the first six months of the financial year
A dozen states run by the ruling Bharatiya Janata Party -- which looks vulnerable in fast-approaching state elections -- announced that they
were matching the federal government's tax cuts with even larger ones of their own.Such actions undercut the claim, made by officials
earlier in Prime Minister Narendra Modi's term, that they'd effectively deregulated fuel prices
More important, the approach is schizophrenic
Making imports such as fuel cheaper for consumers will just increase import demand, meaning more Indians will want to exchange their rupees
for dollars.To stabilize the current account deficit and the rupee, the government should instead be incentivizing Indian consumers, through
the price system, to reduce their demand for imports
Ironically, it's doing precisely that by repeatedly raising tariffs on imports other than fuel.The unfortunate truth is that the
government is simply being buffeted by politics one way and the other
An opposition campaign about high fuel prices appeared to be gaining steam, so the government lowered them
Social media was laughing at the rupee's fall, so the RBI was pressured to step in
Jobs aren't being created because manufacturing in India is still uncompetitive, so tariffs are being raised to force import-substituting
Any government that thinks it can control tariffs, the rupee and inflation, while containing the fiscal deficit, is in for a nasty
surprise.The political fallout of a sliding rupee and higher fuel prices is particularly problematic for PM Modi because his election
campaign in 2013-14 was memorably brutal about the similar predicament in which the last government found itself
And, when global oil prices fell after he was elected in May 2014, PM Modi famously took credit
He's got few sympathizers now that he is, effectively, facing exactly the same chorus of complaints that he himself orchestrated five
years ago.There's blame to go around, though
Opposition leaders demanding cheaper fuel and a stronger rupee, and government officials pretending they can provide both, are all
perpetuating harmful myths about the economy
Meanwhile, the core problem is ignored: Indians' addiction to cheap imported fuel is the economy's greatest structural weakness
Whenever oil prices go up, the rupee will have to slide; fuel prices will have to rise relative to others; and the central bank will have to
worry about inflation.There's only one way out: Invest in renewables, in dams, in public transport and in a genuinely effective social
safety net instead of subsidies
Accepting an addiction is the first step to fixing it
We haven't quite gotten there yet.(Mihir Sharma is a Bloomberg Opinion columnist
He was a columnist for the Indian Express and the TheIndianSubcontinent, and he is the author of "Restart: The Last Chance for the Indian
Economy.")Disclaimer: The opinions expressed within this article are the personal opinions of the author
The facts and opinions appearing in the article do not reflect the views of TheIndianSubcontinent and TheIndianSubcontinent does not assume
any responsibility or liability for the same.
